PayPal 2017 Q3 Conference Call Notes

Our customer metrics, which include net new active accounts and engagement per active account, were record setting. I pay particular attention to these measures as they represent a direct form of feedback on our value proposition, customer experiences and brand.

We acquired 8.2 million net new active accounts this quarter. That is up almost 90% year-over-year and is a record number in our recent history. We ended the period with 218 million active customer accounts with over 200 million consumers now shopping at our more than 17 million merchants. We now expect we will acquire close to 30 million net new active accounts in 2017.

Even with this record-breaking net new active growth in our denominator, engagement per active account continues to improve, increasing to 32.8x per year, up from approximately 30 in the third quarter of 2016. The combination of our growing base and continued growth in engagement drove year-over-year total payment volume growth at spot rates of 30% in the period…

  • CEO Dan Schulman

Once again, there are a lot of highlights to take away from this quarter. This company just keeps delivering. Shares are now up 80% year-to-date which is particularly gratifying because the previous year was fairly frustrating: The company was delivering good results which the share price never reflected. Anyway, the main thing I want you to take away? PayPal’s customer growth is accelerating. Let’s look at some of the other highlights from the quarter.

  • PayPal continues to ride m-commerce wave. Mobile payment volume was $40B this quarter, up 54% year over year. This accounted for approximately 35% of TPV this quarter.

One thing playing to their strengths here, is trend of e-commerce meeting brick-and-mortar experience. COO Bill Ready said:

I’ll just say on in-store, one of the fantastic things that’s happening on top of what Dan was describing, where we have great partnerships both with networks as well as Google and Android Pay and Vodafone and others that allow us to do in-store point of sale, we’re also seeing just amazing momentum on e-commerce-style experiences coming into the store, which really plays to our strength. So things like buy online, pick up in store, you can witness in most major retailers around the country they’re starting to carve all sections of the store that are specifically devoted to buy online, pick up in store. Like, you see more and more of that happening. That’s really a home-field advantage for us that we are becoming the primary way that consumers think about accessing great new digital experiences like that. So we certainly see growth across the board in mobile, but this is a really interesting area for us where we see mobile starting to really come into the store through buy online, pick up in store and those types of things in addition to the way the folks thought about traditionally of using the mobile device at point of sale, where we’ve got great partnerships…

  • Much of mobile commerce success can be attributed to One Touch. 70M consumers now use One Touch, 6M merchants. That’s up 119% and 50% year over year respectively!

  • The many partnerships PayPal has made over the last year has led to more choice. 20M customers now actively choose funding source. These customers spend more on average and have much higher engagement levels with platform.

CEO Schulman insists more partnership initiatives ahead than behind:

“I would say on the partnership front, we are at the very beginning of that. There is much more ahead of us than behind us. We’ve had some marketing campaigns launched within financial institutions to drive card linking to PayPal, but the vast majority of that is still ahead of us.”

  • Venmo processed $9.4B in payment volume, up 93% YOY. Added most net new active accounts in history. Venmo user growth also accelerating.

  • Venmo can now be used to pay wherever core PayPal platform is accepted. This even convinced new merchants to start accepting PayPal, including Williams Sonoma. Has not released 2018 guidance yet but, when it does in 4Q, will include moderate earnings accretion from Venmo. Also, management expects Pay with Venmo transactions to have less built-in transaction expenses than normal PayPal transactions because funding sources will be less credit card and more debit or Venmo balance.

  • Brand value increasing. Last year ranked #90 on Interbrand rankings. This year ranked #80.

  • Partnerships/deals this quarter: Mastercard’s deal extended to around the world, 34 countries can now use PayPal via Nintendo gaming systems (?!?!?), PayPal and Microsoft announced PayPal integration on Skype platform, deal with SHINHANCARD - largest credit card issuer in South Korea - and mirrors deals with credit cards in US.

  • eBay now represents about 13.5% of TPV. Declining about 300-400 basis points per year.

  • On plans for $7B in cash on balance sheet and $3B in cash flow/year:

We’ve got some $7 billion on our balance sheet, as John mentioned, over $3 billion of free cash flow that we’ll have this year. And our intention is to stay acquisitive and be a consolidator in the industry. We look at hundreds of opportunities every single quarter from small investments we make in some interesting startups to much larger, and we look at the whole gamut of that. Now the criteria we look at is it’s got to fit into the vision and mission that we have set out for ourselves.

That’s all I got! Questions/comments/concerns? After yesterday’s rise, PayPal is now third-largest position in my portfolio.

Matt
Long MA, MSFT, PYPL
MasterCard (MA), PayPal (PYPL), Skechers (SKX) and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

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I am thinking of adding to my PayPal position. To do so I want at least 20% growth over the next 3-5 years. I think that is likely with their organic growth plus M&A from their cash, but looking for other opinions.

(I posted this on the Paypal board also, so apologize to those that check both).

Thanks,
Jimbo

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